The domain name manager has cash and is mulling expansion as it continues to record losses.

by Paul Springer

Rightside Group Ltd. (NAME) has plans to expand, but an activist investor wants the company to shake up its operations by eliminating weak products and employees.

Hedge fund manager J. Carlo Cannell maintains that the company is unwisely focusing on generic top-level domain names (GTLDs) instead of playing to its strengths as a domain name registrar.

“In my view, NAME’s registrar has become like a crazy aunt kept in the basement, one that you refuse to adequately clothe or feed, but who steadfastly spins straw into gold used to subsidize a stable of largely substandard new GTLDs such as .democrat, .dance, .army, .navy, and .airforce,” Cannell said in a letter to Rightside board chairman David Panos.

The Feb. 19 letter was disclosed in a March 1 regulatory filing.

Rightside raised $30 million in 2014 through a private-investment-in-public-equity debt offering sold to funds managed by Tennenbaum & Co. LLC. More recently, funds managed by T. Rowe Price Group Inc. (TROW) disclosed a 16.4% stake in the company purchased on the open market.

The company was spun off from Demand Media Inc. (DMD) in 2014.

“The company glosses over this critical revenue component and plays up new GTLDs at the expense of the revenue contribution made by the traditional registrar business,” the letter states.

Rightside took a different view in its assessments of results for the quarter ending in September, when the Kirkland, Wash.-based company recorded a net loss of $4.12 million on $55.67 million in revenues. The loss was up from $3.4 million the previous quarter.

CEO Taryn Naidu said in a Feb. 17 earnings call that numbers added up to positive Ebitda of $4.8 million with adjustments and went on to explain the game plan for this year.

“Now let’s shift the road ahead and the plan for 2016 in which we have a maniacal focus on driving increased profitability through margin expansion in all areas of our business,” Naidu said.

“Our strategy is to capitalize on the market opportunity for new GTLDs is working due to their ability to propel revenue growth and margin expansion. This is particularly true in our retail registrar and the emergent registry business. We are investing in these areas with an eye on pursuing profitable growth in both the short and long-term.”

Rightside had about $45 million in cash on the books, about the same amount it had at the end of the last quarter when it more than hinted at intentions of acquiring new assets.

“We believe our capital structure is appropriate for this stage of our operations and is sufficient to grow the business while pursuing our strategic objectives,” the September filing said.

The company currently has a $165 million market capitalization, and its stock is trading around $8.50–more or less right in the middle of its annual highs and lows of $10.38 and $6.05 respectively.

“We believe that our future cash from operations, together with our ability to access sources of financing, including debt and equity, will provide sufficient resources to fund both short term and long term operating requirements, capital expenditures, acquisitions and new business development activities for at least the next 12 months,” the filing said.

Cannell’s letter to Panos provided a different mandate. “The user interfaces at eNom and Namejet look and feel clumsy and stale,” Cannell’s letter says.

“Looking past the main page of NAME’s sites, the logged-in front-end infrastructure is untouched and acts like time capsule to what existed half a decade ago.”

Cannell, whose funds own a 7.32% stake in the company, refers to it as “ours” in the letter. “I believe that we should sell or even abandon some of our worst extensions. They should not consume all the resources of our company at the expense of the assets that are currently profitable.”

The company should take several specific steps according to Cannell, starting with bringing all products under the eNom.com brand. Other measures include refinancing all debt, terminating “no less than 20% of your weaker staff,” centralizing operations in Seattle while closing other offices, and thoroughly upgrading the eNom.com infrastructure.

Cannell would also like to add two board members “with a suggestion, but not a requirement that two incumbents resign.”

Cannell concluded his letter on a conciliatory note.

“I would prefer to avoid waging an expensive proxy battle to elect my own slate of directors. Such a fight would be costly to both myself and our company. It is my sincere hope that substantive discussions between myself and the current board of directors could result in the infusion of fresh blood without such a fight,” he said.

Neither Rightside nor Cannell responded to inquiries.

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